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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No 0-631
ROSE'S HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-2043000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 East 52nd Street
21st Floor
New York, NY 10022
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (212) 813-1500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Stock Warrants (to purchase Common Stock)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
(continued on following page)
PAGE
(continued from previous page)
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
As of January 31, 1998, of the 10,000,000 shares of common stock delivered
to First Union National Bank of North Carolina ("FUNB"), as Escrow Agent,
pursuant to the Modified and Restated First Amended Joint Plan of Reorganiza-
tion, 1,367,659 shares have been returned to the Company and canceled, and
8,612,661 shares are outstanding. The remaining 19,680 shares held in escrow
will be distributed by FUNB in satisfaction of disputed Class 3 claims as and
when such claims are resolved. To the extent that escrowed shares of common
stock are not used to satisfy claims, they will revert to the Company and will
be retired or held in the treasury of the Company.
As of April 7, 1998, the aggregate market value of common stock held by non-
affiliates of the Company (assuming all pending claims are resolved adversely
to the Company) was approximately $9,089,484.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated Document Location in Form 10-K
Portions of Registrant's definitive Part III, Items 10, 11,
Proxy Statement to be filed in 12 and 13
connection with the 1998 Annual
Meeting of Shareholders.
PAGE
PART I
ITEM 1: BUSINESS
General Development of Business
The Company was incorporated in 1997 to act as a holding corporation, which,
pursuant to the merger described below in this Item 1, became the parent of
Rose's Stores, Inc. Rose's* was organized in 1915 as a family partnership
consisting of Paul H. Rose and his wife, Emma M. Rose, who together opened a
"5-10-25 cent" store in Henderson, North Carolina. By 1927, when there were 28
stores, the business was incorporated in the state of Delaware under the name
of "Rose's 5, 10 & 25 cent Stores, Inc." In 1962, the name was changed to
"Rose's Stores, Inc." Over the years, Rose's opened stores of a larger size.
As a result, Registrant's business evolved from a chain of 5, 10 & 25 cent
stores to a chain of general merchandise discount stores.
On September 5, 1993, Rose's filed a voluntary petition for Relief under
Chapter 11, Title 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the Eastern District of North
Carolina (the "Bankruptcy Court"). Rose's Modified and Restated First Amended
Joint Plan of Reorganization (the "Plan") was approved by Order of the Bankrupt-
cy Court on April 24, 1995. On April 28, 1995, the Plan became effective (the
"Effective Date"). Details of the bankruptcy proceedings are discussed in
Note 1 to the Company's Financial Statements included elsewhere herein.
On August 7, 1997, pursuant to an agreement and plan of merger among Stores
and two newly created, wholly-owned subsidiaries of Stores, Stores became a
wholly-owned subsidiary of the Company. As a result of such merger, each share
of common stock, no par value ("Stores Common Stock"), of Stores was converted
into common stock, no par value ("Common Stock"), of the Company and each
warrant, option or other right entitling the holder thereof to purchase or
receive shares of Stores Common Stock was converted into a warrant, option or
other right (as the case may be) entitling the holder thereof to purchase or
receive shares of Common Stock on identical terms. The powers, rights and other
provisions of the Common Stock was identical to the powers, rights and other
provisions of the Stores Common Stock.
On December 2, 1997, the Company consummated the sale to Variety
Wholesalers, Inc. ("Variety") of all of the outstanding capital stock of Stores
(the "Sale") pursuant to a Stock Purchase Agreement, dated as of October 24,
1997, between the Company and Variety (the "Stock Purchase Agreement"). The
Sale constituted the disposition by the Company of substantially all of its
assets and was approved by the holders of a majority of the outstanding shares
of Common Stock at a special stockholders meeting of the Company on December 2,
1997. The total purchase price for the Sale was $19,200,000, including
$1,920,000 which was placed in escrow. The proceeds of the Sale, net of certain
transaction, closing, and other costs, were $15,331,000 (including $1,920,000
which was placed in escrow). For further information with respect to the Sale,
the Stock Purchase Agreement, and related matters, reference is made to the
Company's definitive proxy statement, dated November 10, 1997, as filed with the
Securities and Exchange Commission (the "Proxy Statement").
* Reference in this Annual Report on Form 10-K to "Rose's" or the "Stores" shall
mean Rose's Stores, Inc. Reference in this Annual Report to "Registrant" or the
"Company" shall mean Rose's Holdings, Inc.
Narrative Description of Business
The Company currently has no business operations and its principal asset
is the net proceeds from the Sale. The Company is actively seeking acquisitions
and/or merger transactions in which to employ its cash so that the Company's
stockholders may benefit by owning an interest in a viable enterprise. There
can be no assurance that the Company will be able to locate or purchase a
business, or that such business, if located and purchased, will be profitable.
In order to finance an acquisition, the Company may be required to incur or
assume indebtedness or issue securities. Pending the use of the net proceeds
of the Sale, the Company has invested, and plans to continue to invest, such net
proceeds in liquid, high quality investments.
ITEM 2: PROPERTIES
As of March 31, 1998, the Company entered into a sub-lease for office space
with Gateway Industries, Inc. The rent is approximately $2,700 a month. This
lease runs through March 30, 2001, but may be terminated by either party with
90 days notice. Warren Lichtenstein, the Company's President, Chief Executive
Officer, and Chief Accounting Officer, is the Chief Executive Officer and the
principal stockholder for Gateway Industries, Inc.
ITEM 3: LEGAL PROCEEDINGS
As a result of the Sale on December 2, 1997 to Variety of all of the
outstanding capital stock of the Registrant's wholly owned subsidiary and sole
operating entity, Stores, the Registrant was relieved of liability for claims
against Stores except to the extent of its indemnification obligations set forth
in the Stock Purchase Agreement. Pursuant to the Stock Purchase Agreement, ten
percent ($1,920,000) of the purchase price for the sale of stock to Variety was
placed in escrow for payment of indemnified losses to Variety. The Stock
Purchase Agreement further provides that if the aggregate cumulative
indemnifiable losses as of December 2, 1998 are less than such amount, the
balance of the escrowed amount will be disbursed to the Registrant at such time
and any further claims for indemnification by Variety shall be satisfied direct-
ly by the Registrant. As of the date hereof, the only material claim arising
under the indemnification obligation of the Registrant to Variety relates to the
assertion by a third party of a right to a fee in the amount of $1.3 million.
The Company disputes its obligation to pay any such fee.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special stockholders' meeting of the Company was held on December 2, 1997
to act upon the proposal (the "Sale Proposal") to authorize the Sale of all the
outstanding capital stock of Stores, a wholly owned subsidiary of the Company,
pursuant to the Stock Purchase Agreement. On the record date, 8,612,661 shares
of Common Stock were outstanding and entitled to vote at the special meeting.
The Sale Proposal was approved by a vote of 4,706,784 in favor, 89,652 opposed
and 9,247 abstaining.
PAGE
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Common Stock was listed on the Nasdaq National Market System until March
11, 1998, at which time the Common Stock was delisted. Since such date, the
Common Stock has traded on the NASD OTC Bulletin Board (symbol "RSTO"). The
Company had 2,749 holders of record of Common Stock on February 6, 1998. The
Company paid no dividends on its Common Stock in 1997 or 1996. High and low
prices of the Common Stock, as reported on NASDAQ, are shown in the table below:
Fiscal Year Fiscal Year
Ended January 31, 1998 Ended January 25, 1997
High Low High Low
1st Quarter 2 5/32 1 11/16 2 3/32 1 5/16
2nd Quarter 1 15/16 1 7/32 2 1/8 1 11/16
3rd Quarter 1 7/8 29/32 1 27/32 1 1/2
4th Quarter 1 11/16 1 7/16 1 31/32 1 1/2
ITEM 6: SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
(Not covered by Independent Auditors' Report)
Restated | Restated
Thirty-Nine | Thirteen
Fiscal Years Weeks Ended | Weeks Ended Fiscal Years
Restated January 27, | April 29, Restated Restated
1997(a) 1996 1996 | 1995 1994 1993
Revenue: |
Total revenue $ - - - | - - -
|
Costs and Expenses: |
Total costs and expenses 347 - - | - - -
|
Other Income 418 - - | - - -
|
Earnings (Loss) From |
Continuing Operations 71 - - | - - -
|
Discontinued Operations: |
Earnings (loss) from |
operation of discontinued |
business (3,163) 380 4,401 | 70,187 (51,282) (66,207)
Loss from disposal of |
discontinued operation (22,446) - - | - - -
Earnings (loss) from |
discontinued operation (25,609) 380 4,401 | 70,187 (51,282) (66,207)
Net earnings (loss) (25,538) 380 4,401 | 70,187 (51,282) (66,207)
|
Net earnings (loss) per |
common share - basic (2.96) 0.04 0.51 | 3.74 (2.73) (3.53)
|
Cash dividends - - - | - - -
|
Total assets 15,408 160,332 171,244 | 204,561 183,186 308,105
|
Excess of net assets over |
reorganization value - 21,872 25,371 | 32,201 - -
(a) On December 2, 1997, the Company sold all of the outstanding stock of
Stores, its sole operating entity. The operating results of Stores prior to
the consummation of the Sale are shown as earnings or loss of discontinued
business. The loss resulting from the Sale is shown as loss from disposal of
discontinued operation.
(b) In accordance with Fresh-Start Reporting, the Company adjusted its assets
and liabilities to reflect their estimated fair market value at the Effective
Date, and made certain reclassifications between gross margin and expenses and
changed the method of accruing certain expenses between periods (see Note 2 to
the Financial Statements). Accordingly, the selected financial data above for
the 39 weeks ended January 27, 1996 are not comparable in material respects to
such data for prior periods.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS FROM OPERATIONS
(Dollars in thousands except per share amounts)
Results of Operations
The following table sets forth for the periods indicated the percentage
which each item listed relates to net sales:
Fiscal Years
% to Net % to Net
1997(a) 1996 Sales Pro forma Sales
Revenue:
Gross sales $ - 661,684 103.1% 700,325(c) 103.2%
Leased department sales - 19,800 3.1 21,638(c) 3.2
Net sales - 641,884 100.0 678,687(c) 100.0
Leased department income - 4,647 0.7 4,898(c) 0.7
Total revenue - 646,531 100.7 683,585 100.7
Costs and Expenses:
Cost of sales - 489,450 76.3 519,727 76.6
Selling, general and
administrative 347 150,143 23.4 153,900 22.7
Depreciation and
amortization - (2,378) (0.4) (3,349) (0.5)
Interest - 7,946 1.2 6,927 1.0
Total costs and expenses 347 645,161 100.5 677,205 99.8
Other income 418 - - - -
Earnings (loss) from
continuing operations 71 1,370 0.2 6,380 0.9
Discontinued operation:
Loss from operation of
discontinued business (3,163) - - - -
Loss from disposal of
discontinued operation (22,446) - - - -
Earnings (loss) before income
taxes and extraordinary item (25,538) 1,370 0.2 6,380 0.9
Income taxes - 76 0.0 1,272 0.2
Earnings (loss) before
extraordinary item (25,538) 1,294 0.2 5,108 0.7
Extraordinary item - loss on early
extinguishment of debt - (914) 0.1 - -
Net earnings (loss) $(25,538) 380 0.1% 5,108 0.7%
(a) On December 2, 1997, the Company sold all of the outstanding stock of
Stores, its sole operating entity. The operating loss of Stores prior to the
consummation of the Sale is shown as loss from operations of discontinued busi-
ness for fiscal 1997. The loss resulting from the Sale is shown as loss from
disposal of discontinued operation. For the prior years, the details of the
operating results of Stores, are shown for discussion purposes. Accordingly,
the selected financial data above for the 1997 fiscal year is not comparable to
the prior years.
(b) Beginning in May 1995, the income statements reflect the application of
Fresh-Start Reporting as described in Fresh-Start Reporting, Note 2 to the
Financial Statements, and are therefore not comparable to prior years. The 1995
year-to-date results are presented on a pro forma basis to reflect the results
as if the Company had adopted Fresh-Start Reporting at the beginning of the
year. The adjustments are related to interest expense, reorganization costs,
depreciation and amortization, advertising accrual, LIFO shrinkage and income
taxes.
(c) The Company's proforma amounts represent the combination of the Company's
historical amounts prior to the Effective Date with the historical amounts after
the Effective Date. See Statements of Operations included in the historical
financial statements.
PAGE
Sale of Rose's Stores, Inc.
On December 2, 1997, the Company consummated the sale to Variety of all of
the outstanding capital stock of Stores, a wholly owned subsidiary of the
Company, pursuant to the Stock Purchase Agreement. The Sale constituted the
disposition by the Company of substantially all of its assets and was approved
by the holders of a majority of the outstanding shares of Common Stock of the
Company at a special stockholders meeting of the Company on December 2, 1997.
The total purchase price for the Sale was $19,200 including $1,920, which was
placed in escrow. The proceeds of the Sale, net of certain transaction, closing,
and other costs, were $15,331 including the $1,920 placed in escrow. The loss
resulting from the Sale was $22,446. For further information with respect to
the Sale, see Item 3: Legal Proceedings.
Prior to the Sale, Stores had incurred a year-to-date loss of $3,163. The
following are the details of that loss:
Gross sales $ 532,260
Leased department sales 14,910
Net Sales 517,350
Leased department income 3,877
Total revenue 521,227
Costs and Expenses:
Cost of Sales 391,530
Selling, general and administrative 127,705
Depreciation and amortization (1,626)
Interest 6,781
Total costs and expenses 524,390
Net Loss $ (3,163)
Net Loss Per Share $ (.37)
Selling, general and administrative expenses (SG&A) include income of $754
resulting from a reduction in prepetition workers' compensation loss reserves.
Also included in SG&A is a loss of $689 related to closed store expenses.
Chapter 11 Proceedings
In accordance with SOP 90-7, the Company adopted fresh-start reporting when
the Company emerged from bankruptcy on April 28, 1995. Under fresh-start
reporting, a new reporting entity is created, and the Company was required to
adjust its assets and liabilities to reflect their estimated fair market value
at the Effective Date, which reduced depreciation and amortization related to
property and equipment; and created a deferred credit, excess of net assets over
reorganization value, which was being amortized over eight years.
At the same time, the Company made certain reclassifications between gross
margin and expenses and changed the method of accruing certain expenses between
periods. In addition, as a result of the Company's emergence, reorganization
expense and income taxes recognized by the Company prior to April 28, 1995, are
not comparable to amounts, if any, recognized subsequent to the Effective Date.
For further information, see Note 2 to the Financial Statements.
To facilitate a better comparison of the Company's operating results for
the periods presented, the following discussion is based on the results of
operations which are presented on a pro forma basis (as described below) for
1995. The combined historical statements of operations for the 13 weeks ended
April 29, 1995 (Predecessor) and 39 weeks ended January 27, 1996 (Successor),
are not included in the discussion due to the lack of comparability caused by
the adoption of fresh-start reporting at the end of the first quarter. Certain
items in the Successor's pro forma statements of operations are not affected by
fresh-start adjustments and are comparable to the historical combined results
of the Predecessor and the Successor.
The pro forma statements of operations combine the results of operations
of the Predecessor and Successor for 1995 and give effect to the transactions
occurring in conjunction with the Plan as if the Effective Date had occurred,
and such transactions had been consummated, on January 29, 1995. The statements
of operations have been adjusted to reflect: the reduction in depreciation and
amortization expense due to the write-off of property and equipment and property
under capital leases; reclassification of DIP interest from reorganization costs
to interest expense; the elimination of all other reorganization costs;
amortization of excess net assets over reorganization value; the effects of
changing to the accrual method for advertising; the reversal of LIFO credits;
accrual of additional shrinkage; and the recording of an appropriate income tax
expense.
Revenue
Excluding the results of discontinued operations (Stores), the Company had
no revenue for 1997.
In 1996, the Company reported sales of $661,684, a decrease of $38,641, or
5.5%, from fiscal 1995. The decline in sales was due primarily to a decline in
sales on a comparable store basis of 5.0%. Same store sales were negatively
affected by the Company's program in the fourth quarter of running less inten-
sive promotions, thereby improving the gross margin rate.
In 1995, the Company reported sales of $700,325, a decrease of $56,031, or
7.4%, from fiscal 1994. The closing of seven stores in May 1995 and one store
in October 1995 were the reasons for a significant portion of the sales de-
crease. Same store sales for 1995 decreased 1.5% from 1994. Same store sales
in 1995 were negatively affected by poor weather at the beginning of the year,
a change in layaway promotions, and by a poor Christmas selling season for re-
tailers in general.
Inflation had little effect on the Company's operations in the last three
years.
Costs and Expenses
In 1996, the cost of sales as a percent of sales decreased .3% from the 1995
pro forma cost as a percent of sales. This was due primarily to (i) lower
shrinkage resulting in a decrease of the cost of sales rate by .1%, (ii)
decreased markdowns resulting in a decrease in the rate by .2%, and (iii) an
increase in the initial markon resulting in a decrease in the rate by .1%. These
decreases in the cost of sales were offset somewhat by a decrease in advertising
co-op income resulting in an increase of .1% in the 1996 cost of sales.
PAGE
In 1995, the pro forma cost of sales as a percent of sales increased .8%
from the 1994 cost as a percent of sales. This was due primarily to (i) higher
shrinkage resulting in an increase of the cost of sales rate by .8%, (ii)
increased markdowns resulting in an increase in the rate by .5%, and (iii) no
LIFO credit was recorded in 1995 resulting in an increase in the cost of sales
rate by .7%. These increases in the cost of sales were offset somewhat by the
reclassification of advertising co-op income and cash discounts to cost of sales
resulting in a decrease of 1.1% in the 1995 cost of sales.
Excluding the results of discontinued operations, the Company had general
and administrative expenses of $347 in 1997 which primarily consisted of Board
of Directors' fees, insurance and professional services.
Selling, general and administrative (SG&A) expenses as a percent of sales
were 23.4% in 1996, and 22.7% in 1995 (pro forma).
The 1996 SG&A included a charge of $657 related to a merger agreement with
Fred's, Inc., which was terminated on August 20, 1996, and a $207 charge for the
reserve for a store closing in 1997. Also included in 1996 SG&A, is income of
$1,397 resulting from the settlement of pre-petition tax claims and some pre-
petition workers' compensation insurance claims.
The 1995 pro forma SG&A increase as a percentage of sales was due in part
to the reclassification of advertising co-op and cash discounts from SG&A to
gross margin and to the decline in 1995 sales. Included in 1995 SG&A, is a gain
of $4,701 which represents the effect of canceling a postretirement healthcare
benefit, a charge of $1,170 for severance costs related to a downsizing on
February 23, 1996, of approximately 175 positions in the home office,
distribution and store operations support staff, and a gain of $586 on the sale
of a store lease.
Excluding the results of discontinued operations, the Company reported no
interest expense for 1997. Interest for 1996 and 1995 pro forma was $7,946 and
$6,927, respectively. Interest expense increased 14.7% in 1996 due primarily
to increased amortization of deferred financing costs and other interest and
decreased 25.9% in 1995 (pro forma).
Other Income
The Company reported other income of $418 for 1997 which included $117 of
interest income from the investment of the proceeds of the Sale and $301 of
management fee income paid by Stores to the Company, which management fee was
to equal the costs incurred by the Company from its organization on August 7,
1997 until the Sale of Stores on December 2, 1997.
Liquidity and Capital Resources
The Company currently has no business operations and its principal asset
is the net proceeds from the Sale. The Company is actively seeking acquisitions
and/or merger transactions in which to employ its cash so that the Company's
stockholders may benefit by owning an interest in a viable enterprise. There
can be no assurance that the Company will be able to locate or purchase a
business, or that such business, if located and purchased, will be profitable.
In order to finance an acquisition, the Company may be required to incur or
assume indebtedness or issue securities. Pending the use of the net proceeds
of the Sale, the Company has invested, and plans to continue to invest, such net
proceeds in liquid, high quality investments.
ITEM 8: FINANCIAL STATEMENTS
See the Company's Financial Statements contained elsewhere herein.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PAGE
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on the Directors required by this Item is incorporated by
reference to the caption "Proposal 2. Election of Board of Directors" in the
Company's definitive proxy statement to be filed with Securities and Exchange
Commission within 120 days after the end of the Company's fiscal year covered
by this report. The information required with respect to Executive Officers is
set forth in Part III, Item 10 below.
The following information is furnished with respect to each of the executive
officers of the Registrant as of February 10, 1998:
Name, Age, Position Business Experience During Past Five Years
Warren G. Lichtenstein (32) Mr. Lichtenstein has served as a director of the
President, Chief Executive Corporation since 1996. Mr. Lichtenstein has been
Officer, and Chief Account- Chief Executive of the General Partner of Steel
ing Officer Partners II, LP, a private investment firm, since
1993 and Chairman of Steel Partners Services, Ltd.,
a private investment firm, since 1993. Mr.
Lichtenstein was Executive Vice President of Alpha
Technologies Group, Inc., a manufacturer of
electronic components, from September 1994 through
September 1995. Mr. Lichtenstein is a director of
Alpha Technologies Group, Inc., Saratoga Spring Water
Corporation, Inc. and Gateway Industries, Inc.
("Gateway"). Gateway was the sole stockholder of
Marsel Mirror and Glass Products, Inc. ("Marsel")
from November 1995 to December 1996. Mr.
Lichtenstein served as President of Marsel from its
formation as an acquisition subsidiary until the
acquisition was consummated. Thereafter, Marsel
appointed a President who had no prior affiliation
with Gateway. Mr. Lichtenstein served as Marsel's
sole director until Gateway disposed of its interest
in Marsel. Marsel filed for protection under Chapter
11 of the Bankruptcy Code shortly following Gateway's
disposition of Marsel.
Jack L. Howard (36) Mr. Howard has served as a director of the Corpo-
Vice President, Secretary, ration since 1996. Mr. Howard has been a registered
Treasurer, and Chief principal of Mutual Securities, Inc., a division of
Financial Officer Cowles, Sabol & Co., Inc., a stock brokerage firm,
since prior to 1993. He is a director of Gateway
Industries, Inc. and Scientific Software Intercomp,
Inc.
Officers of the Registrant are elected each year by the Board of Directors
to serve for the ensuing year and until their successors are elected and
qualified.
PAGE
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
heading "Executive Compensation and Other Information" in the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the end of the Company's fiscal year covered
by this report.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
headings "Principal Holders of Voting Securities" and "Stock Ownership of
Management" in the Company's definitive proxy statement to be filed with the
Securities and Exchange Commission within 120 days after the end of the Com-
pany's fiscal year covered by this report.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
heading "Certain Relationships and Related Transactions" in the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the end of the Company's fiscal year covered
by this report.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Independent Auditors' Report
Statements of Operations for the year ended
January 31, 1998, for the year ended January
25, 1997, for the thirty-nine weeks ended
January 27, 1996, and the thirteen weeks
ended April 29, 1995
Balance Sheets - January 31, 1998 and
January 25, 1997
Statements of Stockholders' Equity for the
year ended January 31, 1998, for the year
ended January 25, 1997, for the thirty-
nine weeks ended January 27, 1996, and the
thirteen weeks ended April 29, 1995
Statements of Cash Flows for the year ended
January 31, 1998, for the year ended January
25, 1997, for the thirty-nine weeks ended
January 27, 1996, and the thirteen weeks
ended April 29, 1995
Notes to the Financial Statements
PAGE
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable
or not required, or because the required information is
included in the financial statements or notes thereto.
3. EXHIBITS
Exhibit
No.
10.1 Second Amended and Restated Trade Debt Note dated as of April
29, 1997, between the Company and M. J. Sherman and Associates,
Inc. (Incorporated by reference to Exhibit 10.1 to Registrant's
Form 10-Q for the quarter ended April 26, 1997).
10.2 Collateral Trust Agreement dated as of April 29, 1997, between
M. J. Sherman and by reference Associates, Inc., as Trustee,
and the Company. (Incorporated by reference to Exhibit 10.2 to
Registrant's Form 10-Q for the quarter ended April 26, 1997).
10.3 General Security Agreement dated as of April 29, 1997, by the
Company to M. J. Sherman and Associates, Inc., as Trustee.
(Incorporated by reference to Exhibit 10.3 to Registrant's
Form 10-Q for the quarter ended April 26, 1997).
10.4 Second Amendment to Second Deed of Trust, Assignment of Rents
and Security Agreement dated as of April 29, 1997, by and
among the Company, Alan H. Peterson, and M. J. Sherman and
Associates, Inc. (Incorporated by reference to Exhibit 10.4 to
Registrant's Form 10-Q for the quarter ended April 26, 1997).
10.5 Continuing Guaranty dated as of August 6, 1997, between the
Lendor Group and the Company. (Incorporated by reference to
Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended
July 26, 1997).
10.6 Security Agreement dated as of August 6, 1997, between Foothill
Capital Corporationand the Company. (Incorporated by reference
to Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended
July 26, 1997).
10.7 Amendment Number Two to Loan and Security Agreement between
Rose's Stores, Inc., as Borrower, Financial Institutions as
listed on the signature pages, as the Lenders, PPM Finance,
Inc., as Co-Agent, and Foothill Capital Corporation, as Agent,
dated as of August 6, 1997. (Incorporated by reference to
Exhibit 10.3 to Registrant's Form 10-Q for the quarter ended
July 26, 1997).
10.8 Stock Purchase Agreement dated as of October 24, 1997 by and
between Variety Wholesalers, Inc. and the Registrant.
(Incorporated by reference to Exhibit 10.1 to Registrant's
Form 10-Q for the quarter ended October 25, 1997).
10.9 Employment Agreement with R. Edward Anderson, Chairman of the
Board, President and Chief Executive Officer, dated October
23, 1997. (Incorporated by reference to Exhibit 10.2 to
Registrant's Form 10-Q for the quarter ended October 25, 1997).
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Registrant filed the following current report on Form 8-K
during the last quarter of the period covered by this report:
(i) Report on Form 8-K dated December 2, 1997,
reporting under Item 2 the completion of
the sale to Variety of Stores.
PAGE
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Rose's Holdings, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ROSE'S HOLDINGS, INC.
By: /s/ Warren G. Lichtenstein
Warren G. Lichtenstein
President, Chief Executive Officer,
and Chief Accounting Officer
By: /s/ Jack L. Howard
Jack L. Howard
Vice President, Secretary, Treasurer,
and Chief Financial Officer
Date: May 1, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Regis-
trant and on the dates indicated:
/s/ Jack L. Howard /s/ J. David Rosenberg
Jack L. Howard, Director J. David Rosenberg, Director
/s/ Warren G. Lichtenstein /s/ Harold Smith
Warren G. Lichtenstein, Director Harold Smith, Director
/s/ N. Hunter Wyche, Jr.
Joseph L. Mullen, Director N. Hunter Wyche, Jr., Director
Earle May, Director
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
January 31, 1998
The financial statements on the following pages have been prepared by
management in conformity with generally accepted accounting principles.
Management is responsible for the reliability and fairness of the financial
statements and other financial information included herein.
To meet its responsibilities with respect to financial information,
management maintains and enforces internal accounting policies, procedures and
controls which are designed to provide reasonable assurance that assets are
safeguarded and that transactions are properly recorded and executed in
accordance with management's authorization. Management believes that the
Company's accounting controls provide reasonable, but not absolute, assurance
that errors or irregularities which could be material to the financial state-
ments are prevented or would be detected within a timely period by Company
personnel in the normal course of performing their assigned functions. The con-
cept of reasonable assurance is based on the recognition that the cost of
controls should not exceed the expected benefits.
The responsibility of our independent auditors, KPMG Peat Marwick LLP, is
limited to an expression of their opinion on the fairness of the financial
statements presented. Their opinion is based on procedures, described in the
second paragraph of their report, which include evaluation and testing of
controls and procedures sufficient to provide reasonable assurance that the
financial statements neither are materially misleading nor contain material
errors.
The Audit Committee of the Board of Directors meets periodically with
management and independent auditors to discuss auditing and financial matters
and to assure that each is carrying out its responsibilities. The independent
auditors have full and free access to the Audit Committee and meet with it, with
and without management being present, to discuss the results of their audit and
their opinions on the quality of financial reporting.
Warren G. Lichtenstein
President, Chief Executive Officer,
and Chief Accounting Officer
Jack L. Howard
Vice President, Secretary,
Treasurer, and Chief Financial Officer
PAGE
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rose's Holdings, Inc.:
We have audited the accompanying balance sheets of Rose's Holdings, Inc.
(the "Successor"), as of January 31, 1998 and January 25, 1997, and the related
statements of operations, stockholders' equity, and cash flows for the year
ended January 31, 1998 and January 25, 1997, and the thirty-nine weeks ended
January 27, 1996. We also have audited the accompanying statements of opera-
tions, stockholders' equity and cash flows for the thirteen weeks ended April
29, 1995, of Rose's Stores, Inc. (the "Predecessor"). These financial state-
ments are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Successor as of January
31, 1998 and January 25, 1997, and the Successor's results of operations and
cash flows for the year ended January 31, 1998, January 25, 1997, and the
thirty-nine weeks ended January 27, 1996, and the Predecessor's results of
operations and cash flows for the thirteen weeks ended April 29, 1995, in con-
formity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, effective April 29,
1995, the Company was required to adopt "Fresh-Start" reporting principles in
accordance with the American Institute of Certified Public Accountant's State-
ment of Position 90-7, "Financial Reporting by Entities in Reorganization under
the Bankruptcy Code." As a result, the financial information for the period
subsequent to the adoption of Fresh-Start reporting are presented on a different
cost basis than for prior periods and therefore, are not comparable.
/s/ KPMG Peat Marwick LLP
Raleigh, North Carolina KPMG Peat Marwick LLP
April 21, 1998
PAGE
STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
Successor | Predecessor
Restated | Restated
Restated Thirty-Nine | Thirteen
Year Ended Year Ended Weeks Ended | Weeks Ended
January 31, January 25, January 27, | April 29,
1998 1997 1996 | 1995
Revenue: |
Total revenue $ - - - | -
|
Costs and Expenses: |
Total costs and expenses 347 - - | -
|
Other Income 418 - - | -
|
Earnings (Loss) From |
Continuing Operations 71 - - | -
|
Discontinued Operation: |
Earnings (loss) from operation of |
discontinued business (3,163) 380 4,401 | 70,187
Loss from disposal of |
discontinued operation (22,446) - - | -
Earnings (loss) from |
discontinued operation (25,609) 380 4,401 | 70,187
Earnings (Loss) Before Income Taxes (25,538) - - | -
|
Income Taxes (Benefits): |
Current - - - | -
Deferred - - - | -
Total - - - | -
Net Earnings (Loss) (25,538) 380 4,401 | 70,187
|
Net Earnings (Loss) |
Per Common Share - basic $ (2.96) 0.04 0.51 | 3.74
|
Weighted Average Shares Used |
In Calculation Of Net Earnings |
(Loss) Per Common Share 8,632 8,632 8,632 | 18,758
See accompanying notes to financial statements.
BALANCE SHEETS
(Amounts in thousands)
January 31, January 25,
1998 1997
Assets
Current Assets
Cash and cash equivalents $ 13,465 1,241
Cash - restricted in Escrow 1,920 -
Accounts receivable - 5,101
Inventories - 141,287
Other current assets - 4,503
Total current assets 15,385 152,132
Property and Equipment, at cost,
less accumulated depreciation and amortization - 7,710
Other Assets 23 480
$ 15,408 160,322
Liabilities and Stockholders' Equity
Current Liabilities
Short-term debt $ - 44,138
Accounts payable 6 19,230
Accrued salaries and wages - 6,422
Pre-petition liabilities - 2,737
Other current liabilities - 10,908
Total current liabilities 6 83,435
Excess of Net Assets Over Reorganization Value,
Net of Amortization - 21,872
Reserve for Income Taxes - 12,996
Deferred Income - 339
Other Liabilities - 740
Stockholders' Equity
Preferred stock, Authorized 10,000 shares;
none issued - -
Common stock, Authorized 50,000 shares;
issued 8,632 at 1/31/98 and 1/25/97 35,000 35,000
Paid-in capital 1,159 1,159
Retained (deficit) earnings (20,757) 4,781
Total stockholders' equity 15,402 40,940
$ 15,408 160,322
See accompanying notes to financial statements.
PAGE
STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Retained
Voting Non-Voting Earnings
Common Stock Class B Stock Paid-In (Accumulated) Treasury Stock
Shares Amount Shares Amount Capital (Deficit) Shares Amount
Balance January 28, 1995 10,800 $ 2,250 12,659 $ 18,795 $ 2,700 $ (40,313) (4,701) $(18,618)
Net earnings for thirteen
weeks ended April 29, 1995 - - - - - 70,187 - -
Cancellation of former equity and
elimination of retained
earnings (10,800) (2,250) (12,659) (18,795) (2,700) (29,874) 4,701 18,618
Issuance of new equity
under the Plan 8,632 35,000 - - - - - -
Balance April 29, 1995 8,632 35,000 - - - - - -
Net earnings for thirty-nine
weeks ended January 27, 1996 - - - - - 4,401 - -
Paid-in capital - taxes - - - - 1,159 - - -
Balance January 27, 1996 8,632 35,000 - - 1,159 4,401 - -
Net earnings for fiscal
year 1996 - - - - - 380 - -
Balance January 25, 1997 8,632 $35,000 - $ - $ 1,159 $ 4,781 - $ -
Net loss for fiscal
year 1997 - - - - - (25,538) - -
Balance January 31, 1998 8,632 $35,000 - $ - $ 1,159 $ (20,757) - $ -
See accompanying notes to financial statements.
PAGE
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Successor | Predecessor
Thirty-Nine | Thirteen
Year Ended Year Ended Weeks Ended | Weeks Ended
January 31, January 25, January 27, | April 29,
1998 1997 1996 | 1995
Cash flows from operating activities: |
Net earnings (loss) $ (25,538) 380 4,401 | 70,187
Expenses not requiring the outlay of cash: |
Depreciation & amortization (1,625) (2,378) (2,549) | 1,812
Amortization of deferred financing costs 562 562 46 | 502
(Gain) loss on disposal of property |
& equipment - (34) (46) | (1)
(Gain) loss on sale of discontinued |
operation 22,446 - - | -
Deferred income taxes - 76 (76) | -
Additional paid-in capital - - 1,159 | -
LIFO expense (credit) - - - | (364)
Extraordinary loss on early extinguishment |
of debt - 914 - | -
Write off of merger costs - 657 - | -
Provision for closed stores & severance 689 77 1,170 | -
Settlement of pre-petition liabilities (754) (1,397) - | -
Gain on termination of postretirement |
healthcare - - (4,701) | -
Fresh-Start revaluation & debt discharge - - - | (73,492)
Cash provided by (used in) assets & liabilities: |
(Inc.) dec. in accounts receivable (14,239) 2,108 824 | (630)
(Inc.) dec. in inventories (45,653) 11,903 31,939 | (40,291)
(Inc.) dec. in other assets 473 (273) 3,577 | (1,197)
Inc. (dec.) in accounts payable 18,645 (4,615) (13,797) | 14,361
Inc. (dec.) in other liabilities (73) (553) (177) | (2,142)
Inc. (dec.) in income tax reserves 148 323 12,673 | -
Inc. (dec.) in reserve for store closings |
& severance (116) (1,227) (4,674) | (1,108)
Inc. (dec.) in deferred income (339) (635) (507) | (201)
Inc. (dec.) in accumulated PBO - (367) 47 | 7
Net cash provided by (used in) operating |
activities (45,374) 5,521 29,309 | (32,557)
Cash flows from investing activities: |
Purchases of property & equipment (1,516) (3,644) (4,921) | (510)
Net cash from sale of discontinued operation 14,563 - - | -
Funds transferred to escrow (1,920) - - | -
Proceeds from disposal of property |
& equipment - 36 45 | 5
Net cash used in investing activities 11,127 (3,608) (4,876) | (505)
Cash flows from financing activities: |
Net activity on line of credit 44,111 10,465 (24,981) | 58,654
Net activity on debtor-in-possession |
facility - - - | (600)
Payments on pre-petition secured debt - - - | (26,423)
Payments on unsecured priority & |
administrative claims (272) (403) (2,463) | (1,593)
Principal payments on capital leases (272) (285) (346) | (281)
Payments of deferred financing costs (629) (1,512) (440) | (2,925)
Inc. (dec.) in bank drafts outstanding 3,533 (9,530) 3,768 | 5,502
Net cash provided by (used in) |
financing activities 46,471 (1,265) (24,462) | 32,334
Net inc. (dec.) in cash & cash equivalents 12,224 648 (29) | (728)
Cash & cash equivalents at beginning of period 1,241 593 622 | 1,350
Cash & cash equivalents at end of period $ 13,465 1,241 593 | 622
PAGE
STATEMENTS OF CASH FLOWS (continued)
(Amounts in thousands)
Successor | Predecessor
Thirty-Nine | Thirteen
Year Ended Year Ended Weeks Ended | Weeks Ended
January 31, January 25, January 27, | April 29,
1998 1997 1996 | 1995
Supplemental disclosure of additional noncash |
investing & financing activities: |
Retirement of net book value of assets |
in reserve for store closings $ 30 - 17 | 623
Capital lease obligations entered |
into for new equipment 887 67 374 | -
See accompanying notes to financial statements.
PAGE
NOTES TO FINANCIAL STATEMENTS
Year Ended January 31, 1998; Year Ended January 25, 1997; Thirty-Nine Weeks
Ended January 27, 1996; and Thirteen Weeks Ended April 29, 1995
(Amounts in thousands except per share amounts)
1 DISCONTINUED OPERATIONS
On August 7, 1997, pursuant to an agreement and plan of merger among Stores
and two newly created, wholly-owned subsidiaries of Stores, Stores became a
wholly-owned subsidiary of the Company. As a result of such merger, each share
of common stock, no par value ("Stores Common Stock"), of Stores was converted
into common stock, no par value ("Common Stock"), of the Company and each
warrant, option or other right entitling the holder thereof to purchase or
receive shares of Stores Common Stock was converted into a warrant, option or
other right (as the case may be) entitling the holder thereof to purchase or
receive shares of Common Stock on identical terms. The powers, rights and other
provisions of the Common Stock was identical to the powers, rights and other
provisions of the Stores Common Stock.
On December 2, 1997, Rose's Holdings, Inc. consummated the sale to Variety
Wholesalers, Inc. of all of the outstanding capital stock of Rose's Stores,
Inc., a wholly owned subsidiary of the Company pursuant to a Stock Purchase
Agreement, dated as of October 24, 1997, between the Company and Variety. The
Sale constituted the disposition by the Company of substantially all of its
assets and was approved by the holders of a majority of the outstanding shares
of Common Stock of the Company at a special stockholders meeting of the Company
on December 2, 1997. The total purchase price for the Sale was $19,200, includ-
ing $1,920 which was placed in escrow. The proceeds of the Sale, net of certain
transaction, closing, and other costs, were $15,331 (including the $1,920 in
escrow). The loss resulting from the Sale was $22,446.
2 REORGANIZATION AND EMERGENCE FROM CHAPTER 11
The Company filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code ("Chapter 11") on September 5, 1993 (the "Filing
Date"). The Company's Modified and Restated First Amended Joint Plan of
Reorganization (the "Plan") was consummated on April 28, 1995 (the "Effective
Date").
The Plan provided for, among other things, the cash payment of $26,423 to
the Company's pre-petition secured lenders and amounts owing under the debtor-
in-possession revolving credit agreement and various administrative and tax
claims due at the Effective Date (Note 9), and the distribution of common stock
of reorganized Rose's to be issued pursuant to the Plan to creditors (Note 11).
Additionally, stockholders of record as of the Effective Date received their
pro-rata share of warrants (Note 11) and the shares of stock, stock options, and
stock warrants of the Company's Predecessor were canceled. In addition, RSI
Trading, Inc., a wholly owned subsidiary of the Company, was merged into the
Company under the provisions of the Plan. Also, a new board of directors was
elected for the Successor. Upon consummation of the Plan, the Company obtained
$125 million of post-emergence financing.
Under Chapter 11, the Company elected to assume or reject real estate
leases, employment contracts, and unexpired executory pre-petition contracts
NOTES TO FINANCIAL STATEMENTS
subject to Bankruptcy Court approval. The Company established and recorded its
estimated liabilities for such items and settled or carried forward portions of
the liabilities (for assumed leases) at the Effective Date.
3 FRESH-START REPORTING
In 1990, the American Institute of Certified Public Accountants issued
Statement of Position 90-7 ("SOP 90-7") "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" (sometimes called "Fresh-Start
Reporting"). The application of Fresh-Start Reporting changed the Company's
basis of accounting for financial reporting purposes. Specifically, SOP 90-7
required the adjustment of the Company's assets and liabilities to reflect their
estimated fair market value at the Effective Date. At the same time, the Company
made certain reclassifications between gross margin and expenses and changed the
method of accruing certain expenses between periods. Accordingly, the statements
of operations and changes in cash flows commencing May 1995, and the balance
sheets beginning with April 1995, are not comparable to the financial informa-
tion for prior periods.
In accordance with SOP 90-7, the reorganization value of the Company was
determined as of the Effective Date. The reorganization value of $35,000 was
derived by an outside company using various valuation methods, including
discounted cash flow analyses (utilizing the Company's projections), analyses
of the market values of other publicly traded companies whose businesses are
reasonably comparable, and analyses of the present value of the Company's
equity.
PAGE
NOTES TO FINANCIAL STATEMENTS
The adjustments to reflect the consummation of the Plan and the adoption
of Fresh-Start Reporting, including the gain on debt discharge for liabilities
subject to settlement under reorganization proceedings, the adjustment to
restate assets and liabilities at their fair value, and the adjustment to non-
current assets for the excess of the fair value of net assets which exceeded
reorganization value, have been reflected in the financial statements below:
BALANCE SHEETS
(Amounts in thousands)
Actual Fresh- Restated
April 29, Debt Start April 29,
1995 Discharge Accounting 1995
Assets
Current Assets
Cash and cash equivalents $ 622 622
Accounts receivable 12,076 (2,841)(a) 9,235
Inventories 160,111 25,018 (b) 185,129
Prepaid merchandise 7,100 7,100
Other current assets 2,475 2,475
Total current assets 182,384 - 22,177 204,561
Property and Equipment, at cost,
less accumulated depreciation
and amortization 33,703 (33,703)(c) -
Other Assets 6,302 (6,302)(c) -
$ 222,389 - (17,828) 204,561
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Current maturities of capital lease
obligations $ 400 400
Bank drafts outstanding 5,762 5,762
Accounts payable 37,642 37,642
Short-term debt 58,654 58,654
Reserve for store closings and
remerchandising 4,952 4,952
Accrued salaries and wages 5,212 50 (d) 5,262
Pre-petition liabilities - 4,352 (e) 4,352
Other current liabilities 9,543 3,878 (f) 13,421
Total current liabilities 122,165 4,352 3,928 130,445
Liabilities Subject to Settlement
Under Reorganization Proceedings 130,276 (130,276)(g) -
Excess of Net Assets Over
Reorganization Value - 32,021 (h) 32,021
Capital Lease Obligations 593 593
Deferred Income 1,792 (311)(i) 1,481
Accumulated Postretirement Benefit
Obligation 6,055 (1,034)(j) 5,021
Stockholders' Equity (Deficit) (38,492) 90,924 (k) (17,432)(l) 35,000
$ 222,389 (35,000) 17,172 204,561
PAGE
NOTES TO FINANCIAL STATEMENTS
(2) Continued
Explanations of adjustment columns of the balance sheet are as follows:
(a) To reflect appropriate current value of accounts
receivable
(b) Adjusted inventories to current market value
(c) Wrote off long-term assets
(d) Increased bonuses payable as a result of emergence from
bankruptcy
(e) Reclassified pre-petition priority claims and cure
amounts
(f) Accrued an additional year of property taxes to reflect
such taxes on assessment date basis, increased insurance
and loss reserves, and accrued any remaining
reorganization costs to be incurred after emergence
from Chapter 11
(g) Unsecured pre-petition claims settled as follows:
(a) $4,352 of priority claims and cure amounts
reclassified to current liabilities
(b) The remaining unsecured claims settled with stock
(h) The excess reorganization value was allocated to non-
current assets, with any excess recorded as a deferred
credit to be amortized over the period of 8 years
(i) Reduction of deferred income to current value
(j) Adjustment to reverse unrecognized gain on transition
obligation
(k) Extraordinary item-gain on debt discharge
(l) Value of new company established
During the third quarter of 1995, the excess of net assets over
reorganization value was decreased by $3,945 for increases in the reserve for
workers' compensation claims and an additional allowance for receivables of the
Predecessor.
The following unaudited pro forma statement of operations reflects the
financial results of the Company as if the Plan had been consummated on January
29, 1995:
Pro forma
Year Ended
January 27,
1996
Total revenue $ 683,585
Total costs and expenses 677,205
Earnings before income taxes 6,380
Income taxes 1,272
Net earnings $ 5,108
Earnings per share $ 0.59
PAGE
NOTES TO FINANCIAL STATEMENTS
The unaudited pro forma statement of operations has been adjusted to
reflect: the reduction in depreciation and amortization expense due to the
write-off of property and equipment and property under capital leases;
reclassification of DIP interest from reorganization costs to interest expense;
the elimination of all other reorganization costs; amortization of excess net
assets over reorganization value, the effects of changing to the accrual method
for advertising; the reversal of LIFO credits; accrual of additional shrinkage;
and the recording of an appropriate income tax expense.
4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fresh-Start Reporting The Company has implemented the required accounting
for entities emerging from Chapter 11 in accordance with the American Institute
of Certified Public Accountant's (AICPA) Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" (SOP 90-7),
and reflected the effects of such adoption in the balance sheet as of April 29,
1995. Under Fresh-Start Reporting, the balance sheet as of April 29, 1995,
became the opening balance sheet of the reorganized Company. Since Fresh-Start
Reporting was reflected in the balance sheet as of April 29, 1995, the financial
statements as of January 25, 1997 and January 27, 1996 are that of a reorganized
entity, and are therefore not comparable in material respects to the financial
statements of the Predecessor. Accordingly, a vertical black line is shown to
separate post-emergence operations from those ended prior to April 29, 1995 in
the financial statements.
Basis of Presentation The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Discontinued Operations Discontinued operations are excluded from the
income from continuing operations and included in net income before extraordi-
nary items. Prior years have been restated to conform with generally accepted
accounting principles.
Nature of Operations The Company currently has no business operations and
its principal asset is cash. The Company is actively seeking acquisitions and/or
merger transactions in which to employ its cash but there can be no assurance
that suitable acquisitions will be located.
Fiscal Year Fiscal year 1997 ended on January 31, 1998. Fiscal year 1996
ended on January 25, 1997. Due to the emergence from Chapter 11, fiscal year
1995 is comprised of the thirty-nine weeks ended January 27, 1996 (Successor),
and the thirteen weeks ended April 29, 1995 (Predecessor). Fiscal year 1997
contained 53 weeks. Fiscal years 1996 and 1995 contained 52 weeks.
Cash Equivalents The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents. Cash
equivalents are stated at cost, which approximates market. Bank drafts
outstanding have been reported as a current liability.
PAGE
NOTES TO FINANCIAL STATEMENTS
Inventories Substantially all merchandise inventories are stated at the
lower of cost, using the last-in, first-out (LIFO) method, or market and include
the capitalization of transportation and distribution center costs.
Deferred Financing Costs The costs related to the issuance of debt are
capitalized and amortized to interest expense straight-line over the life of
the related debt.
Depreciation and Amortization The provision for depreciation and amorti-
zation is based upon the estimated useful lives of the individual assets and is
computed principally by the declining balance and straight-line methods. The
principal lives for depreciation purposes are 40 to 45 years for buildings and
5 to 10 years for furniture, fixtures, and equipment. Improvements to leased
premises are amortized by the straight-line method over the term of the lease
or the useful lives of the improvements, whichever is shorter. Capitalized
leases are generally amortized on a straight-line basis over the lease term or
life of the asset, whichever is shorter. The amortization of the excess of net
assets over reorganization value is included with depreciation and amortization
and is amortized over 8 years. The amortization of the excess of net assets over
reorganization value was $2,937 for fiscal year 1997, $3,499 for fiscal year
1996 and $2,705 for the thirty-nine weeks ended January 27, 1996.
Income Taxes Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Reclassifications Certain reclassifications have been made to the 1996 and
1995 financial statements to conform with the 1997 presentation.
Earnings (Loss) Per Share For the year ended January 31, 1998, the Company
adopted SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). In accordance with
this statement, primary net loss per common share is replaced with basic loss
per common share which is calculated by dividing net loss by the weighted-
average number of common shares outstanding for the period. Fully diluted net
income per common share is replaced with diluted net income per common share
reflecting the maximum dilutive effect of common stock issuable upon exercise
of stock options and stock warrants. Diluted net earnings (loss) per common
share is not shown, as common equivalent shares from stock options and stock
warrants would have an anti-dilutive effect. Prior period per share data has
been restated to reflect the adoption of SFAS No. 128.
Earnings (loss) per share is computed on the estimated number of shares that
will be outstanding if all pending claims are resolved adversely to the Company
for fiscal year 1997, fiscal year 1996 and for the thirty-nine weeks ended
January 27, 1996, and on the weighted average number of shares outstanding
during the period for prior periods. The average number of shares used to com-
pute earnings (loss) per share was 8,632 shares for fiscal year 1997, for fiscal
year 1996 and for the thirty-nine weeks ended January 27, 1996; 18,758 shares
for the thirteen weeks ended April 29, 1995. The exercise of outstanding stock
options
NOTES TO FINANCIAL STATEMENTS
would not result in a dilution of earnings per share for 1996 and 1995 and are
excluded from the calculation. The exercise of outstanding stock options and
warrants would have resulted in an anti-dilutive effect on loss per share for
1997 and are excluded from the calculation.
Stock-Based Compensation Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for stock-
based compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. Refer to Note 12.
5 ACCOUNTS RECEIVABLE
A summary of accounts receivable as of January 25, 1997, is as follows:
January 25,
1997
Layaway receivables $ 1,856
Other receivables 3,665
5,521
Allowance for doubtful accounts (420)
$ 5,101
Other receivables consist primarily of amounts due from vendors for returns,
co-op advertising, and coupons.
The Company does not provide for an allowance for doubtful accounts for
layaways because the Company holds the merchandise.
6 INVENTORIES
A summary of inventories as of January 25, 1997 is as follows:
January 25,
1997
Inventories valued at FIFO cost $ 141,287
LIFO reserve -
Inventories substantially valued
at LIFO cost $ 141,287
As a part of Fresh-Start Reporting (See Note 3), the LIFO reserve was
written off and the base year inventory was restated to the April 29, 1995
value. Since the January 25, 1997 inventories at LIFO cost are greater than
FIFO cost, no LIFO reserve was warranted.
PAGE
NOTES TO FINANCIAL STATEMENTS
7 PROPERTY AND EQUIPMENT
Property and equipment, adjusted for Fresh-Start Reporting (see Note 3),
consists of the following:
January 25,
1997
Buildings $ 46
Furniture, fixtures, and equipment 4,777
Improvements to leased premises 3,724
Total 8,547
Less accumulated depreciation
and amortization (1,190)
7,357
Capitalized leases 441
Less accumulated amortization (88)
353
Net property and equipment $ 7,710
8 DEBT
As of January 31, 1998, the Company had no outstanding debt. As of January
25, 1997, the Company had $44,138 outstanding in short-term borrowings, $11,971
in outstanding letters of credit and unused availability of $8,649. The average
direct borrowings were $52,568 in 1997 and $66,576 in 1996 with an average daily
weighted annual interest rate of 9.8% in 1997 and 9.7% in 1996. The maximum
amount of direct borrowings at any period end was $100,299 in 1997 and $96,202
in 1996.
Foothill Capital, Inc. Facility
On May 21, 1996, the Company entered into a new financing arrangement with
Foothill Capital, Inc. and PPM Finance, Inc., as co-agents. The financing was
a $120,000 three-year revolving credit facility (the "Credit Facility") with a
letter of credit sublimit in the aggregate principal amount of $40,000. The
Credit Facility was secured by a perfected first priority lien and security
interest in all of the assets of the Company and replaced the Company's former
revolving credit agreement which would have expired in two years. As a result
of closing the Credit Facility, a loss on early extinguishment of debt of $914
in prepaid bank fees related to the former facility was recognized as an
extraordinary item in fiscal 1996. The facility was terminated at the time the
Sale of Stores to Variety was consummated (December 2, 1997) and a termination
fee of $2,400 was paid to the lenders.
9 PRE-PETITION LIABILITIES
The Company had pre-petition liabilities of $2,737 at January 25, 1997.
During 1996, the Company settled pre-petition tax claims and some pre-
petition workers' compensation insurance claims resulting in a reduction to pre-
petition liabilities of $1,397. The Company paid $403 for pre-petition
liabilities and reclassed $95 related to landlords to other liabilities.
NOTES TO FINANCIAL STATEMENTS
During the thirteen weeks ended April 29, 1995, the liabilities subject to
settlement under reorganization proceedings increased by $1,818 due primarily
to an additional accrual for lease rejection claims for the seven stores closed
in 1995. As of the Effective Date, the Company paid $1,593 and reclassified to
current liabilities $4,352 of priority claims and cure amounts included in the
remaining liabilities subject to settlement under reorganization proceedings.
The pre-petition secured debt and interest were paid with proceeds from the exit
financing when the Company emerged from Chapter 11. Subsequent to the Effective
Date, the Company paid $2,463 of pre-petition liabilities and established an
additional liability of $2,743 for pre-petition workers' compensation insurance
claims.
10 RESERVE FOR FUTURE STORE CLOSINGS
The closed store reserve increased $615 in 1997 before the balance of $970
was sold to Variety as part of the Sale. The reserve increased $94 in 1996.
Following are the cash and noncash changes to the reserves in 1996 and 1995:
Fiscal Year Fiscal Year
1997 1996
Noncash activity:
Retirement of net book
value of assets $ -
Provision for additional
closing (689) (207)
Other noncash expenses - (100)
Cash expenses 14 213
(Increase) decrease in the
closed store reserve $ (615) (94)
The cash expenses include the operating results until closing, rental
payments and costs of removing fixtures from closed stores as well as subsequent
expenses associated with closings.
PAGE
NOTES TO FINANCIAL STATEMENTS
11 STOCKHOLDERS' EQUITY
Effective April 28, 1995, the Company authorized 50,000 shares of Common
Stock and 10,000 shares of Preferred Stock. No Preferred Stock has been issued.
Pursuant to the Plan, the Company issued and delivered to First Union National
Bank of North Carolina ("FUNB"), as Escrow Agent for the unsecured creditors of
the Company, 9,850 shares of the Company's new Common Stock for distribution on
allowed claims of unsecured creditors in accordance with a schedule for
distributions set forth in the Plan; and 150 shares of the Company's new common
stock were delivered to the Escrow Agent for distribution to officers of the
Company pursuant to a consummation bonus plan approved by order of the Bankrupt-
cy Court on February 14, 1995.
Since emergence, distributions of the common stock, no par value, of the
Company (the "Common Stock") have been made to holders of Allowed Class 3
Unsecured Claims (as defined under the Plan) in accordance with the provisions
of the Plan. As the result of distributions of the Common Stock pursuant to the
Plan, the Company had the following:
January 31, January 25,
1998 1997
Common Stock outstanding 8,613 8,461
Shares reverted to the Company 1,368 997
Shares held in escrow 19 542
Shares delivered to FUNB
on the Effective Date 10,000 10,000
The 19 shares held in escrow will be distributed by FUNB in satisfaction
of disputed Class 3 claims as and when such claims are resolved. To the extent
that escrowed shares of Common Stock are not used to satisfy claims, they will
revert to the Company and will be retired or held in the treasury of the
Company.
On the Effective Date, all shares of the Company's pre-emergence Voting
Common Stock (8,262 shares) and Non-Voting Class B Stock (10,496 shares) were
canceled and the record owners of such stock as of such date became entitled to
warrants to purchase the new common stock of the Company. One warrant was issued
for every 4.377 shares of pre-emergence Voting Common Stock or Non-Voting Class
B Stock and allows the holder to purchase one share of the new common stock.
The total number of warrants issued was 4,286. The warrants may be exercised
at any time until they expire on April 28, 2002. The initial warrant exercise
price of $14.45 was calculated pursuant to a formula set forth in the Plan. The
formula requires that the total allowed and disputed claims of the Company's
unsecured creditors be divided by 9,850, the number of shares of the reorganized
Company's stock to be issued under the Plan. The exercise price was adjusted
to $12.01 on April 28, 1996, the first anniversary of the Effective Date, and
will be adjusted on the second and third anniversaries of the Effective Date to
reflect adjustments to the total of allowed and disputed claims of the Company's
unsecured creditors. The exercise price will be further adjusted on the fourth,
PAGE
NOTES TO FINANCIAL STATEMENTS
fifth and sixth anniversaries to reflect 105%, 110% and 115%, respectively, of
the total of the allowed and disputed claims of the unsecured creditors.
12 STOCK OPTIONS
The Company's New Equity Compensation Plan was adopted on February 14, 1995
and was designed for the benefit of the executives and key employees of the
Company by allowing the grant of a variety of different types of equity-based
compensation to eligible participants. The Plan provides for the granting of
a maximum of 700 shares of stock. The price of the options granted was not less
than 100 percent of the fair market value of the shares on the date of grant.
The options vested immediately with the Sale of Stores. At that time, all
options were canceled. The following table summarizes stock option activity:
Option Price Number of Weighted
Range Options Average Price
Outstanding, January 27, 1996 2.88 - 5.75 388 4.31
Granted 1.78 - 1.88 55 1.85
Canceled 2.88 - 5.75 (125) 4.31
Outstanding, January 25, 1997 1.78 - 5.75 318 3.89
Granted 1.28 - 1.28 20 1.28
Canceled 1.28 - 5.75 (338) 3.73
Outstanding, January 31, 1998 - - - - -
Exercisable at:
January 25, 1997 2.88 - 5.75 88
January 31, 1998 - - - -
On April 24, 1997, the Company adopted a Long Term Stock Incentive Plan
which provides for, among other things, the granting to employees and directors
of, and consultants to, the Company of certain stock-based incentives and other
equity interests in the Company. A maximum of 500 shares may be issued under
the Plan. The options are fully vested and exercisable when issued and expire
five years from the date of issuance. The only options issued under this plan
have been to Directors, in lieu of their retainers or total director's fees.
The following table summarizes stock option activity:
Option Price Number of Weighted
Range Options Average Price
Granted 1.44 - 1.94 98 1.70
Outstanding and Exercisable,
January 31, 1998 1.44 - 1.94 98 1.70
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the stock option plans.
NOTES TO FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
Expected dividend yield 0.00%
Expected stock price volatility 28.00%
Risk-free interest rate 6.63%
Expected life of options 5 years
The weighted average grant-date fair value of options granted during 1997
and 1996 was $.64 and $.70 per share. The pro forma disclosures have not been
included as the compensation cost based on the fair value of the options granted
in 1997 and 1996 is immaterial.
13 INCOME TAXES
Income tax expense consists of the following:
Thirty-Nine | Thirteen
Fiscal Fiscal Weeks Ended | Weeks Ended
Year Year January 27, | April 29,
1997 1996 1996 | 1995
Current: |
Federal $ - - 952 | -
State - - 207 | -
- - 1,159 | -
Deferred (benefit): |
Federal - 67 (67) | -
State - 9 (9) | -
- 76 (76) | -
$ - 76 1,083 | -
A reconciliation of the statutory federal income tax rate to the effective
tax rate is as follows:
Thirty-Nine | Thirteen
Fiscal Fiscal Weeks Ended |Weeks Ended
Year Year January 27, | April 29,
1997 1996 1996 | 1995
% of Pretax Earnings (Loss)
|
Income taxes (benefits) at |
federal statutory rates (35.0)% 35.0% 34.0% | (34.0)%
State income taxes, net of |
federal income tax benefits - 4.5 4.6 | (4.3)
Amortization of excess value - (302.8) (19.0) | -
Reorganization items - (5.6) - | 39.3
Net operating loss |
carryforward - - - | (1.0)
Valuation allowance 35.0 268.9 - | -
Other - - 0.1 | 0.0
- % - % 19.7% | - %
NOTES TO FINANCIAL STATEMENTS
The tax effects of temporary differences since the Effective Date that give
rise to significant portions of the deferred tax assets and liabilities were as
follows:
January 31, January 25,
1998 1997
Deferred tax assets:
Reserves $ - 2,271
Capitalized inventory - 73
Co-op credits - 10
VHS inventory - 354
Percentage rent - 254
Net Operating Loss Carryforward 13,743 3,096
Tax Credit Carryforward - 2
Total deferred tax assets 13,743 6,060
Deferred tax liabilities:
Reserves - -
Percentage rent - -
Fixed Assets - (244)
Total deferred tax liabilities - (244)
Total deferred tax assets
(liabilities) net 13,743 5,816
Less: Valuation Allowance (13,743) (5,816)
Net deferred tax assets $ - -
At January 31, 1998, the Company has certain net operating loss carry-
forwards totaling $39,265 which are scheduled to expire during the years ending
2009 through 2013. The Company has treated net operating losses incurred prior
to the Effective Date in accordance with Section 382(l)(5) of the Internal
Revenue Code. As a result, there is approximately $26,620 in net operating
losses incurred prior to the Effective Date as well as $12,645 incurred subse-
quent to the Effective Date available as carryovers. All net operating losses
may be subject to certain limitations on utilization.
The Internal Revenue Service has examined the Company's federal income tax
returns for the years 1988 through 1991, and claims arising from those examina-
tions have been settled. The provision for these claims made in prior years was
reduced during 1996 to the amount of the settled claim. Federal net operating
loss carryovers for fiscal years subsequent to January, 1992 are subject to
future adjustments, if any, by the IRS. All state income and franchise tax
returns for taxable years ending prior to fiscal 1993 are not subject to adjust-
ment, primarily because of the application of certain facets of Bankruptcy law.
14 LEASED ASSETS AND LEASE COMMITMENTS
As a result of the Sale, the Company no longer has any commitments under
operating leases requiring any future minimum annual payments.
Amortization of capitalized leases was approximately $162 in 1997, $88 in
1996, and $220 in the thirteen weeks ended April 29, 1995. The capital lease
assets were written off in Fresh-Start Reporting (See Note 3), thus no amortiza-
tion was incurred in the thirty-nine weeks ended January 27, 1996.
NOTES TO FINANCIAL STATEMENTS
Total rental expense for the three years ended January 31, 1998 was as
follows:
Successor | Predecessor
Thirty-Nine | Thirteen
Fiscal Fiscal Weeks Ended | Weeks Ended
Year Year January 27, | April 29,
1997 1996 1996 | 1995
Operating Leases: |
Minimum rentals $ 16,723 20,430 15,787 | 5,265
Contingent rentals 2,909 3,417 2,990 | 843
$ 19,632 23,847 18,777 | 6,108
Contingent rentals are determined on the basis of a percentage of sales in
excess of stipulated minimums for certain store facilities and on the basis of
mileage for transportation equipment.
Rent expense for the year ended January 31, 1998, January 25, 1997 and the
thirty-nine weeks ended January 27, 1996, did not include any payments to less-
ors controlled by or affiliated with directors of the Successor. Included in
rent expense was $132 for the thirteen weeks ended April 29, 1995, and $665 for
1994, paid to lessors controlled by or affiliated with certain directors of the
Predecessor.
15 CONTINGENCIES
As a result of the Sale on December 2, 1997 to Variety of all of the
outstanding capital stock of the Registrant's wholly owned subsidiary and sole
operating entity, Stores, the Registrant was relieved of liability for claims
against Stores except to the extent of its indemnification, obligation of cer-
tain claims, as set forth in the Stock Purchase Agreement. Pursuant to the
Stock Purchase Agreement, ten percent ($1,920,000) of the purchase price for the
sale of stock to Variety was placed in escrow for payment of indemnified losses
to Variety. The Stock Purchase Agreement further provides that if the aggregate
cumulative indemnifiable losses as of December 2, 1998 are less than such
amount, the balance of the escrowed amount will be disbursed to the Registrant
at such time and any further claims for indemnification by Variety shall be
satisfied directly by the Registrant. As of the date hereof, the only material
claim arising under the indemnification obligation of the Registrant to Variety
relates to the assertion by a third party, of a right to a fee in the amount of
$1.3 million. The Company disputes its obligation to pay any such fee.
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management and counsel, all material contingencies are either adequately covered
by insurance or are without merit.
16 FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are cash and cash equivalents and ac-
counts payable. The carrying values of these financial instruments approximate
fair value.
PAGE
NOTES TO FINANCIAL STATEMENTS
17 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following is a summary of the quarterly results of operations during the
years ended January 31, 1998 and January 25, 1997:
Fiscal 1997
Quarters Ended
April 26, July 26, October 25, January 31,
1997 1997 1997 1998
Earnings from continued
operations $ - - - 71
Discontinued operations:
Loss from operation of
discontinued business (1,308) (3,986) (1,032) 3,163
Loss from disposal of
discontinued business - - - (22,446)
Net loss $ (1,308) (3,986) (1,032) (19,212)
Net loss per share - basic $ (0.15) (0.46) (0.12) (2.23)
Fiscal 1996
Quarters Ended
April 27, July 27, October 26, January 25,
1996 1996 1996 1997
Earnings from continued
operations $ - - - -
Discontinued operations:
Earnings (loss) from operation of
discontinued business 652 (2,706) 448 1,986
Net earnings (loss) $ 652 (2,706) 448 1,986
Net earnings (loss)
per share - basic $ 0.08 (0.31) 0.05 0.23